India’s increasing long-term borrowing costs have prompted demands from investors for a reevaluation of the supply of government bonds with maturities of 30 years and above. These bonds represent a significant portion of New Delhi’s borrowing needs, accounting for one-third of the total. A marked decline in demand has led to a sharp rise in yields, creating concern among large investors such as insurers and pension funds. Currently, the yield gap between the benchmark 10-year bonds and long-term bonds has widened to approximately 80 basis points, the highest it has been in four years.
Ketan Parikh, the head of fixed income at ICICI Prudential Life Insurance, noted that long bonds have notably lagged behind the market performance during the current financial year. While the yield on the 10-year benchmark bond has decreased by 30 basis points, long-term yields have increased by 15 basis points. The activity of insurance companies, which hold over a quarter of India’s government bonds as per Reserve Bank of India data, has diminished due to a slowdown in premium inflows experienced in recent months. Similarly, pension funds have shown significantly low demand, as stated by Parikh.
With India planning to borrow 2.7 trillion rupees (approximately $31.3 billion) through ultra-long bonds in the first half of the financial year, investor concerns about the substantial supply are growing. Rahul Bhuskute, Chief Investment Officer at Bharti AXA Life Insurance, emphasized the challenges faced by insurance and pension funds in absorbing the current levels of long-term government bond issuance. He advocated for adjustments to the borrowing calendar to better balance demand and supply. In contrast to the rising long-bond yields, rates on bonds maturing within seven years have declined, supported by aggressive purchasing from the central bank.
The market appears to have a healthy appetite for this shorter duration, yet there is hesitation to take on longer duration risks. Sachin Bajaj, Executive Vice President and Chief Investment Officer of Axis Max Life Insurance, suggested that decreasing the frequency of long-term government bond auctions could be a viable solution.